Question

Benson Designs has prepared the following estimates for a​ long-term project it is considering. The initial investment is ​$34570​, and the project is expected to yield​ after-tax cash inflows of ​$9000 per year for 6 years. The firm has a cost of capital of 14​%.

a.  Determine the net present value​ (NPV) for the project.

b.  Determine the internal rate of return​ (IRR) for the project.

c.  Would you recommend that the firm accept or reject the​ project?

Answer 1

a). Determing the Net Present value (NPV) of the Project:

Year	Cash Flows ($)	PV Factor @14%	Present Value ($)
0	(34,570.00)	1.0000	(34,570.00)
1	9,000.00	0.8772	7,894.74
2	9,000.00	0.7695	6,925.21
3	9,000.00	0.6750	6,074.74
4	9,000.00	0.5921	5,328.72
5	9,000.00	0.5194	4,674.32
6	9,000.00	0.4556	4,100.28
		NPV	428.01

So, NPV of the project is $ 428.01

b). Calculating the Internal rate of Return:

Taking, Cost of capital(r) as 15%

NPV = -$ 509.66

As, at rate of 15% NPV is less than 0 & at 14% it is greater than O. Since, IRR is the rate at which NPV is O .

Now Calculating IRR:

IRR = 14.45%

c). As the IRR of the project is 14.45% but the firm's cost of capital is 14% and at this rate NPV of the project is also positive. Thus, you should accept the project.